Moneycontrol BureauThe Indian economy is likely to grow at 7-7.5 percent in fiscal 2015-16 while retail inflation is expected at 6 percent, the government's Mid-year Economic Review authored by Chief Economic Advisor Arvind Subramanian says.Growth for fiscal year 2017 is unlikely to be much higher than it would in 2016, the report added.
The report, tabled in Parliament today, reiterates its previously laid-out FY16 growth target but may be a bit conservative when it comes to inflation, experts said.
Further, the report also reiterated it would meet its fiscal deficit target of 3.9 percent and revenue deficit target of 2.8 for this year. But in a statement that may raise some economists' eyebrows, it said there may be a need to reconsider next year's fiscal deficit target (3.5 percent).
"The benign fiscal situation and improving fiscal conditions have boosted growth this fiscal," the report said. "However, GDP growth has been powered only by private consumption and public investment is a concern. [Going forward] the proposed wage hike for government workers may impact plan for next fiscal."
The report also made several qualitative observations about the state of the economy, saying that the economy continues to send "mixed signals" over growth and that all economic indicators were not yet aligned [towards pointing to a higher trajectory of growth].
Going forward, the economic review listed GST, which has struggled to pass muster in Parliament, and a bankruptcy law, as keys to power long-term growth in the country.Deficit a concern but inflation risk overplayed
Since the economic slowdown of 2012-2013, the government has tried to balance higher public spending with its own fiscal constraints as deleveraging companies have shied away from spending too much.
This has led to a debate whether the government should make more investments into growth-boosting assets at the cost of running a higher-than-expected deficit (difference between its revenues and expenditure).
Credit Suisse Economist Deepali Bhargava said she doubts the government will able to achieve its fiscal deficit of 3.9 percent this year -- not without cutting growth-boosting capital expenditure.In an interview with CNBC-TV18, Bhargava said the year-on-year growth in second-half plan expenditure (loosely, the budgetary name for capex) is likely to be at only 5 percent, compared to 30 percent in the first half."They will also have to evaluate the 3.5 percent figure," she said.Barclays Economist Siddharth Sanyal was more optimistic, saying that while meeting the deficit target would be a challenge, there existed enough headroom for to be achievable.Sanyal added that the government's inflation forecast may be a little conservative. "I am expecting average inflation for FY16 at 5 percent, and slightly higher for FY17," he said.Low inflation, however, may cause a minor headache for the government with respect to its fiscal deficit forecast, both economists said, as the deficit is measured as a percentage of nominal GDP.With nominal GDP growth (which is the sum of real GDP growth and inflation) expected to be lower than the government's original forecast of 11.5 percent (now revised to 8.25 percent), the government will have to make up for the shortfall of about Rs 20,000 crore to reach its deficit target, according to Bhargava.
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